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GBP/USD Remains Oversold Despite BoE Dissent- RSI in Focus

GBP/USD Remains Oversold Despite BoE Dissent- RSI in Focus

David Song, Strategist
GBP/USD Remains Oversold Despite BoE Dissent- RSI in Focus

GBPUSD [2HR – 08/22/2014]. Chart created using FXCM Marketscope

Fundamental Forecast for Pound:Neutral

The GBP/USD slipped to a fresh monthly low of 1.6560 even as the Bank of England (BoE) Minutes showed Martin Weale and Ian McCafferty voting for a 25bp rate hike at the August 7 meeting, but we may see the British Pound regain its footing ahead of the next interest rate decision on September 4 should the fundamental developments coming out of the U.K. further boost interest rate expectations.

Even though the BoE anticipates the strength in the British Pound to dampen the risk for inflation, the ongoing improvement in the labor market may continue to boost the scope for stronger wage growth in the U.K., and it seems as though the Monetary Policy Committee (MPC) will do little to halt a further appreciation in the sterling as it helps to deliver price stability.

With that said, a further expansion in private-sector lending along with a pickup in household confidence may generate an improved outlook for the U.K. economy, and a slew of positive developments may put increased pressure on the BoE to normalize monetary policy sooner rather than later as the central bank anticipates a stronger recovery in the second-half of 2014. Credit Suisse Overnight Index Swaps are current pricing a 40bp rise in the benchmark interest rate over the next 12-months, and it seems as though we would need a further pickup in price growth to boost rate expectations as the headline reading for U.K. inflation cools to an annualized 1.6% from 1.9% in June.

Nevertheless, the technical outlook continues to highlight a risk for a further decline in the GBP/USD as the Relative Strength Index (RSI) pushes deeper into negative territory, and the descending channel carried over from the previous month may continue to take shape over the near-term as the BoE softs its hawkish tone for monetary policy.

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